November 29, 2004

Cellphones Expected to Connect With Holiday Shoppers

Rebecca McLaughlin suspects 2-year-old son Liam is responsible for the sticky goop -- probably apple juice -- that invaded her old Nokia cellphone and rendered it useless.

But who and what caused the problem doesn't matter. What does matter is that she needs a new phone, pronto.

That was why Ms. McLaughlin was visiting the Cingular Wireless, Verizon Wireless and Sprint PCS kiosks and carts just paces apart at Valley View Center last week, trolling for a free phone and the best deal on a wireless plan.

"This is my chance to see what everybody's offering," said Ms. McLaughlin, checking out telephones and plans as 1-year-old son Erik sleepily watched from his stroller.

Over the next month, a lot of people like Ms. McLaughlin will probably look into the latest in cellular plans and phones.

A new rule that gives consumers phone number portability, the introduction of neat gadgets and other factors have made the Christmas holidays the hottest time for cellphone makers and service providers.

Albert Lin, an analyst at American Technology Research, said that cellphone makers that sell to the U.S. market will ring up 40 percent of their entire year's sales during the holiday period.

"That time is absolutely critical to phone makers," he said.

Gartner Inc. analyst Hugues de la Vergne said 2004 promises to be a record year for cellphone sales, and the fourth quarter will be the hottest period of the year.

"This is going to be a blowout year," Mr. de la Vergne said. "It's huge. So far this year, there's been exceptional growth, year over year."

Analysts have projected that cellphone sales worldwide will hit 620 million in 2004, but Gartner has said it could go as high as 650 million if the industry maintains its momentum from the first half of the year. The 650 million would represent a 25 percent jump from 2003's sales of 520 million units.

One factor driving sales is that for those who want the bells and whistles, this season's cellphones have more bling for the buck.

"One thing that you find is that these devices have become more than just phones. They're cameras. They're almost minicomputers in some cases," Mr. de la Vergne said. "With the added functionality and features built into them, they've become more of a gift item than they have historically."

Also driving phone sales is the industry's accelerating switch to the global standard for mobile communications, or GSM, Mr. de la Vergne said. Many phones based on older standards will eventually need to be replaced.

Mr. Lin said that although the season is very important to phone makers, "it's absolutely critical for phone carriers, too."

"This is a time where usually promotions have historically been run," he said. "With the popularity of one-year contracts, everybody in the industry knows there's a larger percentage of customers that are up for grabs."

In past years, wireless carriers had to fight through the reluctance of potential customers who didn't want to give up their old wireless numbers when they left a carrier.

But since Nov. 24, 2003, customers can take their old numbers with them whether they're changing from one wireless company to another, a wired company to a wireless company or wireless to wired, as long it is in the same area.

Local number portability was phased in, beginning with the largest markets. This holiday season is the first in which number portability is available for all U.S. users.

With portability, "it's easier than ever -- once someone comes off contract -- to get them as a customer," Mr. Lin said. "There's tremendous incentive to try and serve that seasonal contract rollover phenomenon that happens now every year."

The Federal Trade Commission said last week that more than 8.5 million consumers changed phone companies and kept their old numbers in the initial year, including both wired and wireless customers.

Although the program didn't provoke as much customer churning as carriers had expected, it caused companies to get more aggressive in their incentives to hold onto customers and capture new ones, Mr. de la Vergne said.

"You've seen some additional subsidies as they've tried to move some of their consumers from one-year to two-year contracts," he said.

An unknown impact on this year's sales will be the merger of Cingular and AT&T Wireless Communications Inc., announced in February and approved in October, and whether the merger will prompt many AT&T Wireless customers to take a look at other companies.

Verizon Wireless, which dropped to No. 2 in size after the merger, unveiled ads recently that proclaimed: "Attention AT&T Wireless customers: As long as your wireless carrier is changing, why not change to the best?"

"I think it is going to present Verizon Wireless a great opportunity because we are going to stick to our message," said Bill McKinney, manager of retail sales for Verizon Wireless.

Soon afterward, Cingular responded with its own ads proclaiming itself "the new leader in wireless" and touting features its plans had and Verizon's didn't.

"It's a competitive time of year," said Leigh Ann Crow, Cingular's marketing director for North Texas.

Mr. Lin said the merger may calm down the wireless market by removing AT&T Wireless as an independent player.

AT&T had to sign a lot of new customers to make up for the high rate of departing ones, he said. To do so, AT&T would make "very, very lucrative or, in some cases, crazy offers to where other carriers would almost have to match them," he said.

"This year, I think it'll be a little more calm for major carriers. But that doesn't mean next year will be calm. Once Cingular starts to digest AT&T, I think we're going to have a battle that tightens between them and Verizon," Mr. Lin said.

Alex Slawsby, senior analyst at research firm IDC, said that for cellphone makers, 2005 sales probably won't grow as strongly as in 2004.

The next big sellers will be telephones that use "3G" high-speed wireless technology, and that technology probably won't become big for consumers until 2006 and later, he said.

"We're kind of in an in-between year," he said, "between the strength of color displays and camera-phones and the move to 3G."

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